In her comment on our study "Administrative Reform and
Environmental Protection: The Case of China," Deborah Seligsohn
raises important questions about event analysis. These methods have been
used widely to get at the effects of various political and economic
shocks, but she questions our choice of the event window and the event
date. The issues are larger: what can we expect to learn from these
types of studies and what can we say about institutional and policy
change in China in particular?

Regarding the event window, Seligsohn argues that the event window
chosen was too narrow and "it most likely should include the entire
period from the adoption of the 11th Five Year Plan and its targets in
March 2006 to the elevation to Ministry status in March 2008. At the
very least, the period from the OECD review in late 2006 through March
2008 needs to be included." Yet this assumes that policy proposals
or policy initiatives may have real effects, even if they are not yet
endorsed by the party leadership (or powerful organizations).

Let us take a recent example. The Third Plenum of the 18th Party
Congress, which was held in November 2013, announced an ambitious agenda
to restructure the relationship between the government and the market.
The agenda was highly praised and deemed to provide new momentum for
China's economic reform (Xu 2015). However, a recent estimation of
reform performance after 2013 concluded that "it is impossible to
resist the conclusion that the reform process overall has stumbled and
is in serious trouble" (Naughton 2017, 3). If a policy initiative
that is announced by the central committee of the Party and endorsed by
the top leader (Xi Jinping) turns out to be (basically) a failure, how
can we be sure that a regular policy proposal such as the 11 th Five
Year Plan (hereafter the Plan) may significantly change polluting
companies' behavior?

It is true that there are certain hard (mandatory) environmental
targets in the Plan, and these targets have been basically met
(according to the Chinese government); (1) however, these targets are
met mainly through certain public investment projects, such as building
more sewage treatment works and more desulfurizing installations (for
electric power plants) (2) or even by radical administrative measures,
such as lazhaxiandian (cutting power to limit consumption) (3) rather
than by encouraging environmental regulatory agencies to implement
environmental regulations more seriously. (4) Why might companies'
performance (and hence investors' expectations) change as a
response to such a broad (or amorphous) pollution control strategy?

Seligsohn also emphasizes the importance of the OECD review as a
possible trigger. International organizations, such as the World Bank
and the International Monetary Fund (IMF), have issued numerous reports,
reviews, and policy proposals concerning China. Whether and to what
extent the Chinese government may adopt these proposals is a debated
issue. For example, the IMF has warned several times that China's
financial stability may face a serious threat in the near future (IMF
2015; IMF 2016; IMF 2017). However, no real change has occurred as a
response to these warnings (Xu and Gui Forthcoming) and it is not even
clear that markets respond to them. Why would an OECD review matter? (5)

Second, there is certainly a tradeoff when deciding the length of
an event window. On the one hand, a short window helps to pin down the
exact effects of an event but may suffer from the problem of information
leakage. On the other hand, a long event window may accommodate more
information, but the results of event studies will inevitably be
contaminated by other news. Following Fama (1991, 1998), most financial
studies prefer to use a short-term event study methodology. This is also
true for some recent studies, such as those of Berkowitz, Lin, and Ma
(2015) (6) and Wang (2017), which used events to investigate the effects
of shocks in China. We follow these practices and found significant
results. Even if there is indeed an information leakage problem, it only
means that our study underestimates the effects of the establishment of
the MEP.

The second concern raised by Deborah Seligsohn is about the event
date. In our paper, we addressed the problem with respect to the
relevant date by choosing March 10 (as covered by the China.org.cn
report), but also looking at March 12 and 17 as alternative event dates
and comparing the mean daily ARs of the sample stocks for the five
trading days around these event dates. We found that the magnitude of
market reaction is the largest on March 17 (the market reaction on March
10, March 11, and March 12 is not only much smaller but also positive).

Seligsohn by contrast argues that "by January 2008, the
intention to raise SEPA to ministry status was well enough known--even
among generalist reporters--that it was reported in the Economist"
and "even the announcement itself occurred on multiple different
days ... Reuters reported on March 12 that the Ministry was announced
two days earlier, meaning March 10. China.org.cn in fact reported on
March 10 that the Ministry had been announced the previous day, i.e.,
March 9."

First, it is not clear that foreign coverage of these evens would
have mattered, because most Chinese investors--and certainly in
2008--got information from Chinese media, particularly newspapers. We
searched CNKI (China National Knowledge Infrastructure), which is a
leading literature dataset in China (covering more than 9,000 academic
journals and more than 500 newspapers). We found that there were only
three news reports regarding the proposal to establish the MEP between 1
January 2008 and 17 March 2008, and none of these three reports was
published in a nationally influential newspaper, such as People's
Daily, Guangming Daily, or Economic Daily. (7) It is likely that these
English reports were irrelevant for most Chinese investors.

Even if certain sophisticated investors who have access to these
English reports try to profit from this opportunity, the lack of
short-selling in China's capital markets means that these
investors, at best, may sell their stocks in advance to avoid potential
loss. Such behavior, at best, influences the market marginally.

We believe that our study reaches significant conclusions about the
market response to an important regulatory change in China. Nonetheless,
we agree with Seligsohn that care is needed when we conduct event
studies, and particularly in a country like China. Choosing the
appropriate event window and event date is always challenging, as an
event, particularly a policy event, may span a period of time, and
information may leak at different stages of the policy process. We
therefore need to carefully examine the full process of policy
decision-making, check all possible sources of information leakage and
consider alternatives as a robustness check.

doi: 10.1017/jea.2019.2

NOTES

(1.) See "Shiyiwu jieneng jianpai huigu" (A review of the
energy-saving and emission reduction targets stipulated by the 11th Five
Year Plan), www.gov.cn/gzdt/2011-09/27/content_1957502.htm. Accessed
October 30, 2018.

(3.) See "Guojia fagaiwei zhuren zhangping huiying
lazhaxiandian" (Zhangping, chairman of the National Development and
Reform Commission, made a response to cutting power to limit
consumption). http://cpc. people.com.cn/GB/64093/64102/14078267.html.
Accessed October 30, 2018.

(4.) Actually, estimation reports that for S02 reduction, only 1.9%
of the total reduction can be attributed to the regulatory efforts. See
note 2.

(5.) In addition, if we follow Deborah Seligsohn's suggestion
to expand the event window to the date when pollution control becomes a
general consensus and the establishment of the MEP is widely discussed,
why don't we extend to 2005, when the Songhua River spill occurred,
or even to 2002, when certain scholars proposed to establish the MEP
(see "Fuojia huanbao zongju kuoquan beihou" (Behind the power
expansion of the SEPA). http://news.sohu.com/20080321/n255833930.shtml.
Accessed October 31, 2018)? Where should we stop tracing back?

(6.) They study the effects of the enactment of China's
Property Law and use the date that the Standing Committee of the
National People's Congress accepted a draft of the Property Law as
the event date. They use two event windows, (-2, +2) and (0, +5).
However, if Deborah Seligsohn reviews this paper, she may suggest
extending the event window to 2002, four years before the event date,
because it is at 2002 when a draft of Property Law was first proposed
and discussed. See "Zhongguo wuquanfa de zhiding" (The
enactment of China's Property Law).
www.iolaw.org.cn/showarticle.asp?id=2153. Accessed October 31, 2018.

(7.) These three reports are on Wenhuibao (Shanghai) (March 11,
2008), Zhongguohuanjingbao (China Environment News) (March 13, 2008),
and 21 shijijingjibaodao (21 Century Business Herald) (March 12, 2008).
Given these newspapers' limited influence, it is hard to believe
that most Chinese investors would change their investment portfolio
based on these reports. Nevertheless, even if they did, this problem has
already been addressed in our paper.